To most people, U.S. real estate still stinks. More than a third of all mortgages are under water, with their holders owing more than their houses are worth. Home prices continue to fall in many areas of the country, and thousands of foreclosed homes are still waiting to be sold. Yet an investor no less than Warren Buffett recently said that if he could, he would buy up a couple of hundred thousand single-family homes.
To Buffett and others with short memories or long time horizons, the investment opportunity created by the housing bust is just that great. Buying up subdivisions full of houses isn't quite practical, so instead, many savvy pros are scooping up real estate investment trusts, home-builder stocks and even a physical house here and there. Economists point to several indicators that suggest their confidence could be well-placed. Mortgage delinquency rates fell to 2008 levels in the first quarter, housing starts are improving, and bidding wars are breaking out in certain cities. "The housing crash is over," says Mark Zandi, chief economist at Moodys.com.
Some investors are ready to get back into real estate investing, using REITs, home-builder stocks or exchange-traded funds.
Simon Property Group (SPG)
The firm's malls and outlet stores helped generate, on average, $546 in sales per square foot, surpassing precrisis levels. It also recently bought French firm Kl pierre and has partnered with a Brazilian firm to develop outlet malls. Simon increased its dividend three times in the past year.
Annaly Capital Management (NLY)
Mortgage REITs are a bet that the cheap-interest-rate environment will continue. Jason Brady, a Thornburg income-fund comanager, says Annaly has one of the sector's more experienced management teams and has done a good job amid recent market volatility.
Camden Property Trust (CPT)
This apartment REIT benefits from fairly strong job markets in Dallas and Houston. Camden has "high quality" multifamily properties and a management team to take advantage of them, says Rick Romano, comanager of the Prudential Global Real Estate fund.
CBRE Group (CBG)
The world's largest commercial real estate services firm, CBRE often acts as a broker in transactions and operates commercial real estate. It benefits from consolidation in the industry, as well as from more corporations outsourcing the management of their facilities, says John Miller, portfolio manager of the Ariel fund. About 10 percent of CBRE's revenue comes from investing in real estate itself.
SPDR S&P Homebuilders (XHB)
With REITs doing well, financial planner Debbie DeMatteo has turned to the stocks of home builders for her clients. Many of the stocks have risen significantly, but DeMatteo says they are still 50 percent below precrisis levels. To reduce the risk of picking the wrong name, DeMatteo sticks with ETFs to gain exposure not only to home builders such as Lennar and PulteGroup but also to housing-related plays like Home Depot and Williams-Sonoma.
At least some investors believe in the recovery: They've poured $1.7 billion into global real estate funds this year, even as stock funds continue to experience outflows, according to Morningstar. Apartment REITs have been among the big beneficiaries of new money. Home ownership is down four percentage points to 65 percent nationwide from the mid-aughts, and more people are living in rented apartments. "These REITs are the primary beneficiary of all things bad in single-family housing," says Jim Sullivan, managing director at research firm Green Street Advisors in Newport Beach, Calif. Landlords are raising rents and there isn't much new construction in most markets. Apartment REITs are generating profit growth not seen in years. Despite the 15 percent gain the group has logged over the past year, Rick Romano, comanager of the Prudential Global Real Estate fund, still favors such REITs because there are few signs that renters are about to buy new homes en masse.
Some managers, meanwhile, are looking for ways to play real estate without betting on a nationwide robust recovery. Mortgage REITs such as Annaly Capital Management are "less a bet on property values and more on companies taking advantage of an attractive funding market," says Jason Brady, comanager on several income-oriented funds for Thornburg Investment Management. For investors with some extra money, upgrading existing homes or buying other properties is becoming an increasingly attractive option. Debbie DeMatteo, cofounder of the Goshen, NY. based advisory firm 10-15 Associates, recommends investors nab a mortgage at historically low rates, even if they already have cash. Some pros also are adding home-builder stocks, on the bet that hammers will have to be picked up at some point to meet demand.
To be sure, residential real estate isn't roaring back, and economists say there could still be more price declines. Commercial REITs have had a strong two-year run and aren't dirt cheap. Analysts say a global economic slowdown could halt both recoveries quickly. In short, REITs are hardly foolproof. During the downturn, many such trusts even cut or eliminated dividends. Nevertheless, the investment opportunities look too good now for some pros to pass up. Dean Catino, cofounder of Monument Wealth Management in Alexandria, Va., allocates about 20 percent of his clients' portfolios to real estate. "We are leery of the general bond market and think real estate is a good hedge," he says.